taxes

IRS Cracks Down on Retirees Who Don't Take Required Distributions From IRAs

Not withdrawing the full amount will result in a steep penalty.

Ronald Fatoullah (pictured at left) is an elder-law lawyer and coauthor of The CPA's Guide to Long-Term Care Planning. Here are excerpts from Kiplinger's recent interview with Fatoullah:

A report by the Treasury’s Inspector General estimated that more than 250,000 individuals failed to take required minimum distributions valued at $348 million in 2006 and 2007. Why do so many people fail to comply with the rule?

In every instance that I’ve been involved with, seniors’ failure to take their RMDs was unintentional. They may have several IRAs in several different places. The law says that they are supposed to calculate each RMD, but they can take the RMD from any one of their IRAs. That's confusing.

What's the deadline?

If you turned 70½ this year, you have until April 1, 2014, to take your first RMD; older IRA owners must take a distribution by December 31.

What's the penalty for failing to take a required distribution?

It's a whopping 50% of what you should have taken out. Let's say someone has $1 million in an IRA. At age 70½, that individual must take out $36,496. If he doesn't, the penalty is more than $18,000. That is huge. And he still has to pay income tax on the full amount. There's no statute of limitations on this.

How likely is it that you'll get caught?

The custodians that administer your account have to report what your RMDs are. They send that report to you and to the IRS. The IRS knows what you should have taken, and it also knows what you did take out. They're going to catch you.

What's your advice for seniors who are required to take RMDs before year-end?

Be very careful. If you have multiple IRAs, coordinate your distributions so that you meet IRS rules.

What about seniors who failed to take an RMD in the past?

If you didn't take an RMD or didn't take the entire amount required, I'd advise you to take the RMD immediately. Don't wait and combine missed distributions that were due in previous years with the RMD you will take later on for the current year. The IRS can waive part or all of the 50% penalty if you can show that any shortfall in distributions was due to reasonable error and that you're taking steps to remedy the situation. File IRS Form 5329, "Additional Taxes on Qualified Plans," and attach a statement of explanation. When requesting a waiver, don't pay the 50% penalty upfront. Waivers are typically granted when people neglected to take distributions because of physical illness or dementia. We have had great success in getting waivers in the past. But with the IRS cracking down on IRA mistakes, the future is uncertain.

Most Popular

Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021

Recommended

Today is the Last Day to Fund Your IRA and Cut Your Taxes
Tax Breaks

Today is the Last Day to Fund Your IRA and Cut Your Taxes

Although you need to act quickly, you still have a few hours to make a 2020 IRA contribution and lower your tax bill.
May 17, 2021
9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by today's tax deadline than just filing y…
May 17, 2021
8 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

8 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 10, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021